Planning Opportunities for Income Tax & Business Transition or Second Star to the Right & Straight on Till Morning Presented by: Robert S. Lipsey Peter J. May FPA Presentation

2011 Are these the changes you expected? The uncertainty continues as we get closer to 2013 it will get worse…or better?

What we will cover today Key changes in the new law Opportunities – what has really changed? Opportunities – 2011 & 2012 & Beyond Business Planning Concepts Questions FPA Presentation

Disclaimer This communication is not a covered opinion as defined by Circular 230 and is limited to the Federal tax issues addressed herein. Additional issues may exist that affect the Federal tax treatment of the transaction. The communication was not intended or written to be used, and cannot be used, or relied on, by the taxpayer, to avoid Federal tax penalties. This Presentation is for educational use only. Does not constitute a complete analysis of all issues on this subject. Not intended for use for a specific client. FPA Presentation

Income Tax Changes – Let’s Review FPA Presentation Federal Tax RatesSingleMarried Filed Jointly 10%$0-$8,500$0-$17,000 15%$8,500-$34,500$17,000-$69,000 25%$34,500-$83,600$69,000-$139,500 28%$83,600-$174,400$139,500-$212,300 33% (36%)$174,400-$379,150$212,300-$379,150 35% (39.6%)Over $379,150

Tax Changes – Comments An extension of 2010 rates Tax-bracket thresholds increased slightly Standard deductions up slightly FPA Presentation

Tax Changes – Additional Details Itemized deduction - state/local sales tax [2011] Repeal of personal exemption phase-out [2012] Repeal of itemized deduction limitation [2012] Increase of AMT exemption amounts Extension of 15% LTCG [2012] Extension of 15% Qualified Dividends [2012] Payroll Taxes – 2% reduction - employees & self-employed [2011] FPA Presentation

Tax Changes – Additional Details Bonus Depreciation Section 179 Expensing Grant Programs – Wind, Solar, Renewables Tax Credits - Railroad Track Maintenance Enhanced Deductions for select donations FPA Presentation

Quick Review of Estate & Gift Tax Changes $5 million estate tax exemption $5 million gift tax exemption $5 million GST tax exemption Portability for Estate & Gift tax but not GST Tax – Unless renewed portability & the amount of the exemption is only for 2011 & FPA Presentation

Current Proposals for Additional Changes FY 2012 Budget Proposal ….. “except for higher income taxpayers” Itemized deduction limitation Personal exemption phase out Itemized deduction cap of 28% and the list goes on and on….. FPA Presentation

Current Changes….Yet to Arrive Medicare taxes – 0.9% additional tax [2012] – 3.8% qualified unearned income tax [2012] FPA Presentation

Debt is nothing like we have seen in the history of the U.S. (Heritage Foundation) U.S. is $13 -$14 trillion in debt States have billions in unfunded liabilities – they are broke! Obama health care “trillions” The math doesn’t work Where will the money come from? FPA Presentation

Prediction of the future FPA Presentation

Back to the Future What happens if the estate tax goes to 55% (again!)? What happens if it reverts to 2009 tax levels? Is it the tax?….or, Is it how do I control where my business goes and what happens that is important? FPA Presentation

Family Owned Business Issues Family Relations Concerns – Active vs. Inactive – Competent vs. Incompetent – Skippy FPA Presentation

Family Owned Business Issues Income Concerns Between Family Members – Fair vs. Equal – Value for Job Well Done – Value for Heir / Bloodline FPA Presentation

Family Owned Business Issues Control Concerns – Family Members – Key Employees FPA Presentation

Family Owned Business Issues Transition Concerns – Estate Timing – Recapitalization – Cash Flow “affordability” FPA Presentation

Family Owned Business Issues Family Relations Concerns Income Concerns Between Family Members Control Concerns Transition Concerns FPA Presentation

Transferring a Business (some methods) Revenue Neutral Sales FPA Presentation

Transferring a Business (some methods) Installment Sales FPA Presentation

Transferring a Business (some methods) SCIN’s FPA Presentation

Transferring a Business (some methods) Sales to Grantor Trusts FPA Presentation

Transferring a Business (some methods) GRAT Planning FPA Presentation

Transferring a Business (some methods) Revenue Neutral Sales Installment Sales SCIN’s Sales to Grantor Trusts GRAT Planning FPA Presentation

Comparison for sample individual Results for specific individuals may vary FPA Presentation

Transfer present value FPA Presentation

Does the Act Create A False Sense of Security? 2 year window? Can you give away $5 million? Is it too soon to act? Revolving Door Complex? FPA Presentation

Valuation Planning Techniques Book FPA Presentation

Valuation Planning Techniques Adjusted Book FPA Presentation

Valuation Planning Techniques DCF FPA Presentation

Valuation Planning Techniques Capitalization FPA Presentation

Valuation Planning Techniques Comparables FPA Presentation

Valuation Planning Techniques Book Adjusted Book DCF Capitalization Comparables FPA Presentation

Somethings No One Thinks About Artwork / Collections / TPP Ability to “unbalance” – Your estate plan – Your current income tax strategy Life Insurance Art Funds FPA Presentation

Some other questions we have gotten FPA Presentation

I don’t know what to do – I don’t have successors for my business. I don’t want to sell now. FPA Presentation

Alternative Succession Planning if No Family Succession Plan Some situations are helped by creating a “synthetic stock plan” – How it works: Synthetic stock is created for a percentage of the “equity stake” in the company Synthetic stock is awarded over time; for example 30% equity stake is awarded, at passing they key people need only purchase 70% of the value of the company, hence the “leg up.” FPA Presentation

“I’ve done my planning – everything is in a series of LLC’s” FPA Presentation

LLC’s (What they don’t do) Without additional planning an LLC is not a transfer mechanism An LLC may assist as a control mechanism, but without additional planning it doesn’t completely shift the income stream FPA Presentation

My plan is to use an ESOP- I get income tax deductions, raise capital & it is part of my estate transfer plan. FPA Presentation

ESOP Issues Repurchase liability Control beyond the current family ownership Valuation may be in conflict with your estate valuation; and cause a higher value and more estate tax FPA Presentation

Closing Remarks & Questions Planning should be considered based on all the facts available Instead of looking for what is there, Look for what is not We have enjoyed the time today FPA Presentation

Thank You Robert S. Lipsey Peter J. May FPA Presentation